Shearman And Sterling

Litigation, Columns

Feb 13, 2020

Contracting with Disclosed Principals: Who is Your Counterparty?

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It is often taken for granted that only the named parties to a contract can enforce it.[1] The English Court of Appeal has recently considered an important derogation from that assumption in the context of an arbitration claim.

In the combined appeals of Filatona Trading v Navigator Equities; Danilina v Chernukhin [2020] EWCA Civ 109, the issue for the Court was the enforcement of a contract by a person who enters the contract as a disclosed and identified principal of a named party. The Court concluded that there is a heavy burden to show that the terms of the contract and/or the surrounding circumstances exclude a disclosed and identified principal from exercising rights under the contract.

The case highlights the right of a principal to enforce a contract entered on his behalf by an agent where the agency relationship is known to the counterparty and the possibility that a named party who enters a contract as agent may not in fact be a party to it. Even if the counterparty is unaware of the agency relationship (and the principal’s existence), the principal may still be able to enforce the contract. Named parties to contracts should be aware of these possibilities and, if they wish to exclude them, make clear provision for it in the contract.

Background

The key facts were these:

  • In 2001, Oleg Deripaska—a well-known Russian businessman—and Vladimir Chernukhin—a wealthy Deputy Finance Minister of the Russian Federation—agreed to set up a joint venture to purchase a controlling interest in a textile company, TGM.
  • Mr Chernukhin needed to be discreet engaging in business activities while he was a state official. Therefore, Mr Chernukhin wanted Mr Deripaska, as a prominent businessman, to be the public face of the venture and it was intended that Ms Danilina (with whom Mr Chernukhin was in a relationship at the time but who was not independently wealthy) would be involved in running the business. 
  • In May 2005, the parties belatedly recorded their agreement to the joint venture in a Shareholders’ Agreement (SHA). As to the SHA:
    • Mr Deripaska was identified as the beneficial owner of Filatona Trading and together they were described as “Party 1.”  
    • Ms Danilina was identified as the beneficial owner of Navigator Equities and together they were described as “Party 2.”
    • The “Parties” were defined as Party 1, Party 2 and Navio Holdings. 
    • Mr Chernukhin was not mentioned in the document, nor did he sign it. However, a separate document recorded that Party 1 and Party 2 to the SHA had contributed equal amounts to the acquisition of shares in TGM, and that the contribution of Party 2 had come from Mr Chernukhin.
  • Following disagreement between Mr Chernukhin and Mr Deripaska over the management of TGM in 2009 (including the “forcible takeover” of TGM’s premises and business), Mr Chernukhin and Navigator brought a claim against Mr Deripaska and Filatona under an arbitration clause in the SHA. The Deripaska parties contested the jurisdiction of the arbitrators on the basis that Mr Chernukhin was not a party to the SHA. Ms Danilina also issued a separate claim in the Commercial Court against Mr Chernukhin and Navigator claiming, amongst other things, that she, not Mr Chernukhin, was a party to the SHA.

The Appeal

A person who enters a contract as principal and whose interest in the contract is known to the counterparty (even if his identity is not) is a disclosed principal. He can sue or be sued on the contract made on his behalf by an agent acting within the scope of his authority. This is to be contrasted with an undisclosed principal (whose existence is not known to the counterparty), where the rules regarding in what circumstances he can enforce the contract are less clear.

At first instance, Teare J found that, notwithstanding the terms of the SHA, Mr Chernukhin was clearly a party to the SHA as a disclosed (and identified) principal. This was because Mr Deripaska had always understood:

  • That Mr Chernukhin (not Ms Danilina) was his joint venture partner and the true beneficial owner of Navigator.
  • Why Mr Chernukhin might not wish (given his official role) to be identified as the beneficial owner of Navigator or named in the SHA. 
  • That Ms Danilina had agreed to be Mr Chernukhin’s nominee.

These findings were not open to challenge on appeal and formed an important foundation for the Court of Appeal’s decision. The issue for the Court of Appeal was that even if Mr Chernukhin were a party to the SHA (as a disclosed principal), it was possible that the terms of the SHA and/or the surrounding circumstances might exclude his right to sue under it.

Delivering the main judgment, Simon LJ noted that no cases have considered the circumstances where a disclosed principal is excluded from suing on it. He therefore drew analogies with cases concerning undisclosed principals in order to uphold Teare J’s finding that nothing in the SHA (or surrounding circumstances) excluded Mr Chernukhin’s right to sue under it and that Ms Danilina was not a party. The key points on appeal were: 

  • Consistent with the removal of a party’s rights generally at common law, clear and unambiguous words are necessary to show that only the named party, to the exclusion of her disclosed principal, may sue under the contract. There is, therefore, a “heavy burden of persuasion” on a party who argues that an identified and disclosed principal is to be excluded from a contract. 
  • The naming in a contract of the parties to it does not unequivocally and exhaustively define the parties—it is only the start of the enquiry. 
  • A key purpose of the SHA was to bind the beneficial owners of the corporate parties to the contract. Mr Deripaska’s knowledge that, in the case of Navigator, the beneficial owner was in fact Mr Chernukhin meant that he would be taken as willing to treat Mr Chernukhin as a party—otherwise Mr Deripaska would not have the benefit of binding the true beneficial owner of Navigator. 
  • One of “Party 2’s” obligations was to fund the venture. The importance of this obligation, being one which Mr Chernukhin, and not Ms Danilina, could perform, was inconsistent with Ms Danilina being the true joint venture partner and a party to the exclusion of Mr Chernukhin, notwithstanding that Ms Danilina had obligations herself under the SHA that were also important to the success of the venture.
  • An entire agreement clause in the SHA referring to the contract as the complete and exhaustive agreement between the “Parties” added little to the appellants’ case, given that the surrounding circumstances and absence of any prior agreement were consistent with Mr Chernukhin, as disclosed principal, being one of the parties.
  • A separate supplemental agreement between the same named parties to the SHA provided that a transfer of Navigator’s beneficial ownership to Mr Chernukhin would not constitute a “change of control” for the purposes of the SHA. While this appeared to exclude Mr Chernukhin as a party with rights under the SHA—if he were a party, there would be nothing to transfer to him—it at least recognised his position and suggested that he was intended to be bound by the SHA. If it were otherwise, he would have “broken cover” in the supplemental agreement without acquiring any rights.

Accordingly, the appeals were dismissed and Mr Deripaska’s challenge to the arbitrators’ jurisdiction failed. 

 Contracting with Principals and Agents

Filatona Trading provides some helpful pointers for proposed contracting principals and agents, and their counterparties. For principals who wish to sue on a contract:

  • Where possible, seek to be a named party to the contract.
  • If this is not feasible or desirable in the circumstances, ensure that your counterparty is put on notice, preferably in writing (and with his written acknowledgment), that you are acting as principal in respect of the transaction and the named party is your agent acting within his authority.
  • If you cannot disclose your position as principal, seek to ensure there are no surrounding circumstances that suggest the agent is the true principal and try to avoid any wording in the contract that is inconsistent with your position as principal. 

For counterparties/potential agents:

  • If you wish to avoid any uncertainty over who you can sue or who can sue you under your contract (and, as a potential agent, you would rather be the party bound to the contract), seek to include express “no agency” and/or no “undisclosed principal” provisions in the contract. 

Footnotes

[1]   In the absence of a third party having been given the right to enforce the contract under the Contracts (Rights of Third Parties) Act 1999.

Authors and Contributors

Susanna Charlwood

Partner

Litigation

+44 20 7655 5907

+44 20 7655 5907

London

Jonathan Swil

Counsel

Litigation

+44 20 7655 5725

+44 20 7655 5725

London